Bank restructuring
Bank restructuring
Bank restructuring takes up the largest portion of the 117-
point supplementary reform package that was agreed between the
government and the International Monetary Fund on April 7, for an
obvious reason. The ailing banking industry is one of the central
roots of the causes of the economic crisis and the cost of bank
restructuring is also the largest among the reform measures.
The supplementary package estimates the total cost of bank
restructuring at Rp 155 trillion (US$19.4 billion) or 15 percent
of gross domestic product. Around Rp 80 trillion of the total has
been injected as liquidity credits to ailing banks. The other Rp
75 trillion will be used to strengthen problem banks currently
under the management or close supervision of the bank
restructuring agency (IBRA). These crippled banks include the
seven suspended early this month, seven more put under the
management of the IBRA and 40 others under the close supervision
of the agency.
So huge have been the funds pumped by the central bank into
the banking system that many banks apparently have so far been
hanging like dank corpses, unable to lend and able to survive
only through government handouts and Bank Indonesia's printing
presses. This condition once again testifies to how urgent it is
to enact a proper bankruptcy law. Without proper insolvency and
liquidation procedures, the economy will continue to accumulate a
stock of unproductive assets like the crippled banks.
The huge fund injection also shows how the central bank has
dangerously overextended its function as a lender of last resort.
As the case of the seven banks already suspended and seven more
put under IBRA management shows, the almost Rp 30 trillion in
liquidity credits pumped into these 14 banks proved to be
ineffective in restoring them to sound operations.
Bank Indonesia's lender-of-last-resort facilities are meant
to support only illiquid but solvent banks and not insolvent ones
and to prevent banking panics and runs. But the central bank
seemed so preoccupied with the prevention of another wave of bank
failures after the November closure of 16 banks that it has
showered almost all problem banks, including insolvent ones, with
liquidity.
This "panicked" liquidity injection, without first thoroughly
assessing the problems and the quality of the banks' assets,
might have been prompted partly by the blanket guarantee provided
by the government for the claims of depositors and creditors on
all locally incorporated banks since late January.
The central bank seemed to lack reliable information from its
supervisors as to which of the banks were approaching insolvency
and which ones were already insolvent. Indiscriminate injections
of liquidity credits to ailing banks causes moral hazards because
the closer a bank is to insolvency the stronger are the
incentives for the management and owners to hide information from
supervisors and the market.
Finance Minister Fuad Bawazier's statement last week that the
14 crippled banks would still have to be subjected to due
diligence to ascertain the responsibility of their management and
owners strengthened our concern that both the central bank and
IBRA still seem to be in the dark about what the real nature and
extent of the distressed banks' problems.
IBRA should avoid the central bank's costly mistakes in the
handling of the seven suspended banks and seven others under its
management. It should act firmly and quickly in assessing which
of the 40 other distressed banks currently under its close
supervision are still bailable and which ones should be
suspended.
The parameters used by IBRA as the threshold for suspending
banks -- those receiving central bank injections equal to more
than five times their equity or 75 percent of their assets -- and
the threshold for putting banks under its management -- receiving
injections equal to more than five times its equity or more than
Rp 2 trillion per bank -- seem too lenient.
We are afraid the management and owners of a bank which
already owes the central bank or IBRA more than five times its
own capital no longer has the incentive to restore their bank to
a sound footing. Nor do they see any big risks of further
dissipating whatever assets their bank still has.
Injecting liquidity to ailing banks without first assessing
their assets and their prospective business viability amounts to
throwing good money after bad at great expense to the taxpayer.
The haphazard manner and snail's pace at which the central bank
is deciding to transfer problem banks to the IBRA "hospital"
might overwhelm this agency with many banks with worthless
assets. IBRA also might eventually be overloaded with too many
ailing banks for which it will not have enough qualified
managers.